The average price of low-sulfur fuel oil has risen through the first week of December in four key ports, reaching $543 per metric ton, as demand from shipping ramps up ahead of the Jan. 1 IMO 2020 deadline.
An IHS Markit analysis of the average very low-sulfur fuel oil (VLSFO) price taken from the bunker hubs of Rotterdam, Antwerp, New York, and Singapore shows the price rising by about $10 mt last week
In Europe’s busiest port of Rotterdam, just over half of all November bunker sales are estimated to have been for very low-sulfur fuel (VLSFO). According to Rotterdam’s Timetobunker app, VLSFO sales rose to 95,000 mt last month, from 32,000 mt in October and 1,700 mt in September.
Timetobunker represents about half of the bunker market in the port, but Ronald Backers, Rotterdam’s bunkering expert, said the VLSFO sales trend was representative of all bunker sales in Rotterdam.
Despite daily volatility in pricing, an average taken from the four key ports shows the price of VLSFO has traded in a range of $530 to $545/mt for the past two weeks, the IHS Markit analysis shows.
The price differential between VLSFO and high-sulfur fuel oil (HSFO) is currently 76 percent, or $234 per mt, according to IHS Markit, even with a recent increase in high-sulfur prices thought to be driven by demand from scrubber-fitted vessels combined with lower supplies as refiners throttle back on HSFO output ahead of the IMO mandate. IHS Markit is the parent company of JOC.com.
As of Jan. 1, 2020, sea-going vessels may only use fuel with a sulfur content of no more than 0.5 percent, down from the current cap of 3.5%. Vessels installing emissions-cleaning scrubbers can continue to burn HSFO.
Scrubber wisdom to be tested
The price spread through 2020 between low- and high-sulfur fuel will test the wisdom of the scrubber strategy. Should the price differential remain wide, it will give carriers deploying vessels fitted with scrubbers a distinct cost advantage over VLSFO-consuming rivals, especially on the Asia-Europe trade where a large portion of the vessels will be deployed. But in a scenario where HSFO prices rise significantly due to growing scrubber demand and lower high-sulfur supplies, that cost benefit will start to erode.
The Oil Price Information Service, a sister company of JOC.com within IHS Markit, assessed the spread between VLSFO and HS 380 CST oil at $256/mt in Rotterdam on Monday. The spread has widened by $32 since Nov. 1 when it was $224/mt, given to a $25 drop in high-sulfur and $7 gain in VLSFO over the past six weeks.
McKinsey and Co. said in a November report that the scrubber order book increased from 1,600 scrubbers in September 2018 to about 3,700 scrubbers this September. The analyst forecasts about 3,000 scrubbers will be installed by 2020, accounting for nearly 800,000 barrels per day of high-sulfur fuel, or about 16 percent of current bunker demand.
The resulting economies of scale have made scrubber economics more favorable, with McKinsey estimating payoff periods for the installation will range from one to three years.
Lars Jensen, CEO and partner at Sea-Intelligence Maritime Consulting, writing in a JOC.com commentary last week, said by the end of next year, the capital cost of installing the exhaust-cleaning systems should have been covered.
Jensen believes this could have benefits for shippers and he expects to see contract negotiations in 2021, and even more so in 2022, having a severe reduction in the associated bunker adjustment factor (BAF) levels on the Asia-Europe trade.
The 2020 contract talks for many shippers on Asia-Europe have recently been concluded, and while there is a low-sulfur cost element, some shippers told JOC.com they negotiated decreases in 2020 contract rates compared with this year’s level.
The logistics buyer of a German-based retailer shipping 15,000 TEU a year on the China-North Europe trade said he secured a 10 percent decrease in the contract rate, with a $115 per TEU low-sulfur surcharge on top.
Shippers say different contract approaches were being taken to cover the effect of low-sulfur, ranging from wrapping the bunker increases in an all-in contract rate using their own or a carrier’s formula, to adding 15 to 20 percent to a spot rate linked to the Shanghai Containerized Freight Index (SCFI).
Some shippers were lucky enough to lock in 12-month contracts from mid-2019 to mid-2020, with one beneficial cargo owner (BCO) telling JOC.com he had negotiated mostly flat rates for the contracted period but budgeted for an 8 percent increase in fuel-related surcharges.